Fear Your Members

Consumers with sophisticated plaintiff’s attorneys see changing regulations as a potential goldmine.

When I joined the credit union movement in 2011, I was drawn to its cooperative principles and the warm relationships credit unions have with members.

Let’s be honest, it’s a love fest—and I love that! It’s what drives your membership and will continue to do so for years to come.

Unfortunately, I have some bad news for you. In addition to loving your members, you must fear your members as well.

The ever-changing landscape of consumer finance law and regulation has modified how you do business, changed the demographics of your membership (more members who are younger and more sophisticated)—and has probably caused you additional expense in staff, vendor relations, and Advil over the last several years.

It has also provided savvy members who have sophisticated plaintiff’s attorneys a gold mine. That gold could be coming from you.

Let me paint you a picture. Recently there has been quite a bit made of the Consumer Financial Protection Bureau’s (CFPB) and NCUA’s proclamation that they will take a flexible approach with compliance for the first six mortgage rules which took effect in January 2014.

Fantastic! Music to your ears! Not so fast.

Enter Mr. and Mrs. Savvy Member. The Savvy Members go into their local credit union (you) on Valentine’s Day 2014 and wish to buy a house. Given the flexibility granted to you by CFPB and NCUA, you are still working on implementing the recent mortgage rules.

Consequently, you don’t obtain the proper documentation to originate a qualified mortgage, you do not give them an appraisal notice, and your first mortgage notes do not reflect the mortgage loan originator and mortgage loan originator organization IDs.

Not a big deal, right? Hang on.

Let’s say one year down the road The Savvy Members fall on hard times, they can no longer make their mortgage payments, and they default. The Savvy Members hire Ms. Sophisticated Plaintiff’s Attorney and she quickly identifies the gaps in documentation, paperwork, and information.

You, credit union, have a problem on your hands. You did not legally comply with the rules. It did not matter that your examiner gave you flexibility—the law did not.

Therein lies my fear. In my experience, the most commonly articulated fear from credit unions of not complying with ever-changing regulations is the “examiner risk.” I am not here to undermine that fear—it’s valid.

The missing puzzle piece in the risk assessment, however, is the litigation/legal risk. It is critical to consider these very different risks.

Look, I’m a lawyer and might have a bit of a bias here. Let me reassure you, however, that I am not naïve in thinking that your legal risk will dictate your choices. It shouldn’t. But, it should always be a consideration.

So, as a lawyer, I thought I would offer some free advice: Fear your members.

Don’t fear them because they are mean or scary; fear them because they are smart.

Fear them because they have more resources today than they have ever had. Fear them because we do live in a litigious society.

Most of all, fear them because your business requires it.

Assessing risk is critical in this industry. If you are looking only at one piece of a larger puzzle, you may meet Ms. Sophisticated Plaintiff’s lawyer sooner rather than later.